A typical example of processing an order in a traditional functional-oriented firm can be seen in the figure below. As one can easily see, the natural sequence of the business process “order processing” is not reflected in the given structure.

Order processing in a functional organization (Vahs, 2007)

In a functional-oriented organization, the management board develops a strategy and each functional unit should then implement this strategy, developing its objectives, which results in what is termed “silo effect”. Consequentially, every unit sets its own priorities in order to fulfill its objectives, often resulting in a divergence of effort (Braganza and Korac-Kakabadse, 2000). Such a functional-oriented firm is like a pyramid with many hierarchical levels. Work is divided up among different functions at the highest levels of the hierarchy and at lower levels, work is allocated to specialized activities (Hinterhuber, 1995). As a consequence of these hierarchical and functional barriers, operative islands emerge (see figure below).

Functional and hierarchical barriers lead to operative islands (Hörrmann and Tiby, 1991)

Some serious disadvantages of the functional- and hierarchical-oriented organization include:

• The structure is inflexible, hence it is difficult to change (Hinterhuber, 1995).
• It does not reflect the natural sequence of business processes although it is a business process which creates value for the customer (Hinterhuber, 1995).
• There is a poor customer orientation.  Silo-oriented organizations do not easily permit their employees to concentrate on the customers and their problems. What is missing is trans-sectoral harmonization and information. Departments are trying to make their internal issues perfect (they are internally focused), but they do not think about possible improvements in terms of the customer which may result from collaborating with other departments (Gulati, 2007). Since certain key business processes, such as the order fulfillment process, cut across several departments, functional-based structures have difficulties in meeting customer needs because no one “owns” the issue of how long it takes or how much it costs to fulfill the customer requirements (Davenport,
  1993).
• In a functional-oriented organization, the work is broken down into simple tasks. However, this leads to disintegration of the natural business process. The number of interfaces is growing and therefore the coordination efforts are increasing. Usually, every interface represents loss of time, loss of information and a source for organizational irresponsibility (who is responsible for errors?) (Osterloh and Wübker, 1999).
• Finally, there is often poor communication between departments (Braganza and Korac-Kakabadse, 2000; Osterloh and Wübker, 1999; Garvin, 1998).